(This is a guest post by Ruchir Sharma, head of emerging markets at Morgan Stanley Investment Management and author of the new book, Breakout Nations: In Pursuit of the Next Economic Miracles.)
After nearly two decades of investing in emerging markets, much of it traveling from the gritty alleys of Bihar to the rooftop helipads of Sao Paulo in search of opportunity, I’ve developed an unusual rule of the road: watch the changes in the list of top billionaires, learn how they made their billions, and note how many billions they made. Changes in the list, and the size and source of the fortunes, can provide a quick indicator of how well positioned emerging nations are to compete in the global economy.
If a country is generating too many billionaires relative to the size of its economy, this concentration of wealth can lead to stagnation.Take China. A healthy economy produces great wealth in a competitive environment, and by that measure China, for example, is still strikingly healthy. Turnover among its top 10 billionaires is high, and few have ever amassed a fortune of more than $10 billion; indeed there is reason to believe Beijing is enforcing an unwritten rule that caps total wealth. In the last fifteen years China has generated much more overall wealth than any other country, but its richest man is now worth about $10 billion, far less than the billionaires in much smaller economies, including India, Mexico, Russia and Nigeria.
It is also telling that two men who in the last decade held the title of richest man in China are now in jail on corruption charges of one kind or another. That is not to say that the charges were baseless, only that in China’s freewheeling business culture, the authorities seem to pay particularly close attention when the deal-making generates fortunes approaching $10 billion. Deng Xiaoping declared that “it’s glorious to be rich,” but the message now is, not too rich. The government appears intent on generating competitive churn at the top, in part to contain social resentments.
Now look at Russia, where one hundred billionaires control fortunes worth an astonishing 20 percent of national GDP. Russia has nearly as many billionaires as China but they control twice as much total wealth in an economy one-fourth the size. Just as striking, Russia is missing not only a middle class but also a millionaire class; according to Boston Consulting Group, China ranks third in the world for number of millionaires, while Russia is not even in the top 15 for millionaires.
The growing business influence of the state is reflected in the fact that 69 of those billionaires live in Moscow, the largest concentration for any city in the world. Protected by their patrons, the richest face little competition. Eight of the top 10 are holdovers from 2006. More than 80 percent of the wealth of Russian billionaires comes from non-productive industries like real estate, construction and especially commodities, namely oil and gas, in which political ties can sustain fortunes indefinitely. In no other developing nation is this share greater than 35 percent. Even in Brazil, a commodity economy at the same income level as Russia, the non-productive share of billionaires’ wealth is just 12 percent.
If billionaires are prospering by cultivating political connections, rather than new industries, it could feed the kind of revolt that toppled Suharto in Indonesia in the 1990s. In the global media India is still closely associated with its technology entrepreneurs, but lately these dynamic moguls are getting replaced on the billionaire list by a new group: provincial tycoons who have cut deals with state governments to corner the market in location-based industries like mining and real estate. With no wealth or inheritance taxes, India has long been top heavy with billionaires, but this class is now exploding, perhaps faster than in any other country. In 2000 there were no Indian tycoons among the world’s top-one-hundred billionaires; by 2011 there were seven, a number topped only by the United States, Russia, and Germany. In 2012, due to the poor performance of the Indian stock market, that number had fallen down to four.
Comparing the billionaires of India and China reveals how differently each economy is developing. In the developing world, India lags only Russia, and Mexico in the average wealth of its top ten billionaires. Turnover at the top has been slowing as well. All of the top-ten Indian billionaires on the latest Forbes list are holdovers from the 2006 list, while the 2006 list had only five holdovers compared to 2001. In contrast, China’s billionaires account for barely 3 percent of the economy and only four of the top 10 are holdovers.
Despite these signs of stagnation, many of India’s super-rich still inspire national pride, not resentment. The contrast to Latin America, where the super-rich ride around bullet proof cars and try to lie low, is striking. In Mexico, which has seen virtually no tycoon turnover in years, the world’s richest man, Carlos Slim, lives in a relatively discreet 6-bedroom home behind high walls in Mexico City.
The billionaire lists are not only a negative indicator. The relatively low concentration of national wealth in the billionaire class is one reason why the prospects of nations at the bottom of the billionaire index are relatively bright in a slowing world economy. Many of these nations also have few holdovers among the 2011 top 10, with just five in South Korea, and two (out of six) in the Philippines.
It can be very misleading to compare a developed nation like the United States to younger, faster moving economies, but a quick scan of the US billionaire lists does reveal a few interesting developments. You expect to see larger and more established fortunes, and you do in the United States, where the average fortune of the top 10 richest is $31 billion, but the overall billionaire share of GDP (10.6 percent) would be about average by emerging market standards.
America’s billionaires have also survived the financial crisis relatively unscathed. Whereas the Japanese tycoons who preceded them were felled as a group by Japan’s crisis in the early 1990s, the top US billionaires rose to dominate the global top 10 in the last 20 years and they held those positions despite the American-born crisis of 2008. That suggests that the Americans were much better at adapting to catastrophic global upheaval. Indeed what stands out on the US list is that the greatest and most stable fortunes have been generated by independent and innovative leaders who founded exactly the kind of productive companies (particularly Microsoft, Berkshire Hathaway and Walmart) that would make any economy, developed or emerging, more globally competitive.
The billionaire lists are likely to grow more useful over time, as the sample for emerging markets grows. (Indonesia has only one holdover on its top 10 list, but mainly because it had only two billionaires in 2006). It’s clear what to look for: the number of billionaires should be proportionate to GDP, billionaires should face competition that generates turnover and limits their share of the economy, and billionaires should emerge primarily from productive new industries, not patronage. Creative destruction lies at the heart of a prospering capitalist society, and because well-connected incumbents have everything to gain from the established order, they are the enemies of capitalism.
(The author is head of emerging markets at Morgan Stanley Investment Management and this essay has been adapted from his new book, Breakout Nations: In Pursuit of the Next Economic Miracles.)